Gearing Up for E3

The video game industry received a welcome jolt on the eve of the annual Electronic Entertainment Expo (E3) in Los Angeles as Sony Computer Entertainment slashed the price of its market leading PlayStation 2 console to $199. Microsoft matched that move 24 hours later, cutting the price of the Xbox to $199.

Sony also cut the price on its original PS One 50 percent to $49. While the moves came as no surprise, their timing was and they provide a clear signal that hardware makers are intent on driving this console battle beyond the early adopter and into the mass-market.

In part because the GameCube is already at a sub-$200 price and also because it's chasing a different, younger audience than Sony and Microsoft, Nintendo is not facing the same pressure to lower its MSRP right away. Nintendo of America issued a statement following the Sony announcement saying, "Nintendo has no plans to drop the price of the Nintendo GameCube in North America; the Nintendo GameCube was launched at a price-point attractive to the mass-market and the system and software continue to experience strong and growing sales."

But that is unlikely to quell rumors that Nintendo may have to go to $179 or even $149, either now and some time this summer, in part because GameCube doesn't offer DVD playback and so doesn't offer the same value at $199 as its competitors do.

“Sony's price cuts are clearly the first shot across the bow in the latest battle in the video game wars that, unlike their console counterparts, are real and not virtual. With billions of dollars at stake long term, Nintendo will no doubt follow suit and lower prices as the race is on to grab market share,” said Michael Gartenberg, research director with Jupiter Research.

While the pre-show announcements no doubt stole some of the thunder from this year's E3, the show should offer plenty in the way of not only new games, but also potentially new revenue streams through the launch of online connectivity for consoles.

For the most part, E3 finds the game industry in strong shape. Sony's PlayStation 2 continues to dominate with a North American installed base of more than 10 million, but both the Xbox and GameCube had solid launches last holiday that fueled optimism about their chances going forward.

But it's not quite all blue skies.

“March was off 6 percent, making it the first month where things were down year over year,” noted George Harrison, Nintendo of America's senior VP for marketing and corporate communications.

Good News For Game RentalsThe good news for game retailers, especially in the rental market, is that consumers have embraced the new-generation game machines without completely abandoning older consoles such as the Nintendo 64 and the original PlayStation.

“The three new platforms already represent a majority of our rents on a weekly basis,” said Steve Lundeen, VP, interactive merchandising at Blockbuster Inc. “However, it is important to note that we still see a healthy percentage of our rents with older platforms.”

That theme was echoed by Randy Webster, merchandise manager with Vancouver-based Rogers Video, who said, “You can see by the number of turns we're getting for games that the number of consumers owning the new systems today is a lot healthier than it was a year ago.”

Given PlayStation 2's broad lead among consumers thus far, it might be tempting for both consumers and retailers to declare this console battle conclusively over. But Ed Bland, Xbox director of U.S. sales and channel marketing, points out the current lifecycle is still in the early adopter stage, and it may be years before a winner is determined.

“When you look back at the console battles of the past, an incredible number of systems get sold at $149 and below, and we're not even close to that yet,” he said. “Right now, we're going into the serious gamer stage, and we won't get to the casual gamer until much later.”

These price cuts are certainly going to give retail a huge boost, simply because it will accelerate the installed base.

“A faster installed base equals more rents,” said Lundeen of Blockbuster, which last week unveiled a $19.99 monthly game pass and extended its five-day rental term on games to one week.

Rentals More Important to Game IndustryThis also should be the year Xbox and GameCube join PlayStation 2 as major sources of rental revenue.

“There really wasn't much of a rental market for GameCube last fall, but I think it will gradually become important this year as the GameCube installed base increases and the software library grows,” Nintendo's Harrison said.

Harrison and Bland stressed the importance of rental to their companies going forward, and after years of manufacturers privately grumbling that any game rental was a potential lost sale, this year's E3 may provide the best indication yet of the game community's embrace of video stores.

“First, there are just so many storefronts in prime locations,” said Glenn Halseth, a former Hollywood Entertainment executive who is the sales and marketing VP for publisher Kemco USA.

“If you combine Hollywood Video and Blockbuster, you are looking at close to 8,000 locations. That's more storefronts than Wal-Mart, Target, Best Buy, Toys ‘R' Us, KB, Game Stop and EB (Electronics Boutique) combined,” Halseth said. “What third party wouldn't want to take advantage of those additional storefronts?”

He added that's especially true for mid-tier publishers such as Kemco, which will be showing 10 games at retail, including the potential sleeper hit, Batman Dark Tomorrow. “It's a super opportunity for the title that may not be well recognized, but is simply just a quality game,” Halseth said.

E3 Must-See ListHeading into this year's E3, there are already a number of titles on attendees' must see list, including Nintendo's Mario Sunshine, Metroid and Animal Crossing; the latest Lara Croft game, Tomb Raider: The Angel of Darkness, from Eidos; Sega's Gungrave and Shinobi, and, of course, a host of sports games from Acclaim, Electronic Arts, Microsoft, Sega and Sony.

As for what to look for at this year's E3, Blockbuster's Lundeen wants to see how developers are taking advantage of these platforms' power now that they've worked on them for a few years.

“The initial titles released on the new platforms took advantage of the new technology and graphics power, but they used proven genres, such as strategy and role-playing adventures,” he said. “We are looking forward to seeing who has taken this new technology and combined it with awesome creativity into a new game-play experience.”

The final major issue likely to be resolved at this year's E3 is online gaming for consoles and its potential impact on both brick and mortar sellthrough and rental.

Nintendo announced last week that it will begin selling two $34.99 modems — one each for broadband and traditional dial-up connectivity — and both Sony and Microsoft are expected to provide further details of their Internet plans at the show.

But Webster, for one, suggested that Internet play is likely to have little negative impact on game rentals over the short term and may, in fact, boost sales and rents of some games by consumers curious to get online and find out what all the hype is about.